Rescue plan for Ireland better for banks than for the country itself

24 November 2010

Rescue plan for Ireland better for banks than for the country itself

Ireland has, as expected, asked the EU and the IMF for financial support. A loan package of between €80- and €100 billion will very probably form the core of a rescue plan. With this the Irish government can try to return the banks, which are the cause of the problems, to good health. Just as in Iceland the banks grew far beyond the capacity of the country’s economy.

Ewout Irrgang and Harry van Bommel, Members of Parliament for the SP

The question imposes itself as to who will actually benefit most from this aid, because even if the Irish banks should be returned to health, the country’s burden of debt will remain unhealthily high. Despite this, Finance Minister Jan Kees de Jager firmly rejects a partial debt cancellation for Ireland. This is wrong on two counts. In the first place the problem of high indebtedness will not be solved in this way. Investors seem to regard Ireland and Greece in the same way, given that the interest rates payable on Irish and Greek state loans remain extremely high. The chance is great that some sort of debt cancellation will take place over a few years, but that this will be done with our money.

The second way in which it is wrong is because - if the intervention succeeds - bankers and investors in Irish state debt will have been saved by the European taxpayer. The global financial sector should, if only from considerations of justice, have to pay part of the Irish bill. The suggestion that the Netherlands must rescue Ireland in order to help our own pension funds is absolutely ridiculous. If we really care about our pension funds, it would be much cheaper to aid them where appropriate with a direct injection of capital.

It is not only the failure to cancel debt that galls, but also that Ireland will not be obliged to increase its absurdly low corporation tax of 12.5%. Ireland has been highly successful in tempting firms with this low tariff, without actually being able to afford to do so. Ever since the end of the 1990s the SP has been arguing for a European minimum corporate tax rate in order to put an end to this. It was repeatedly above all Ireland who blocked any discussion of the idea. In addition, the Irish financial sector was known for its weak regulation, and numerous investment funds and others were attracted to Dublin. It would be unacceptable were no end to be put to these practices now that Ireland has come to us for help.

Ireland followed Greece, and Portugal appears already to be sitting in the waiting room. So we muddle on, going from bad to worse. Will we be rescuing Spain after Portugal? The size of the Spanish economy makes this inconceivable. In any case, the emergency fund is too small to manage this. Just over ten years after the launching of the European Monetary Union (EMU) the fundamental problem of the eurozone is becoming ever more pressing. Southern Europe and Ireland are developing economically in a different way to northern Europe. Because of this their competitive position is under pressure, which is leading to economic stagnation in these countries because they can no longer devalue their currencies in relation to those of northern Europe.
If you once have a single currency, the costs of giving it up will be high. Aside from the organisational costs, the principle problem will be the loss of confidence. The costs of staying in the Eurozone will, for Greece and Ireland however, be even higher.

An argument you hear often is that the national debt of these countries is in euros, and that leaving the euro and devaluing their own currency offers no solution because it would mean that the debt, denominated in this new currency, would therefore be higher. What this ignores is that a form of debt cancellation seems in any case to be necessary. Greece should be able to choose for itself to reintroduce the drachma, to devalue it by 20% and to adopt a law stating that the debt would be repaid in drachmas. In this way the country would at the same time have carried out a debt cancellation.
It is not the case that withdrawing from the de eurozone and devaluation would be painless for the people in these countries. A devaluation of 20% makes foreign products 20% dearer. If imports make up roughly half of the economy, prices would rise by 10%. That would represent a major loss of purchasing power.
There are, however, a few major differences between this and the plans of the IMF and the EU. If the competitive position must be improved and the means to achieve this is a 20% cut in wages, then purchasing power will also decline by 20%. That is a great deal more than would happen in the case of devaluation.
Another important difference is that it is much more difficult to get rid of a high debt burden when wages are lowered by 20% than if they remain at the same level, even taking into account higher prices.

That is the kernel of the problem of southern Europe and Ireland: a poor competitive position caused by accession to the euro in combination with a high state debt. By lowering wages the first problem will be solved, but the second will be exacerbated. For these countries years of economic stagnation threaten should the EU and the IMF get their way. It would therefore not surprise us if a number of countries which are in difficulties come eventually to the conclusion that continuing to participate in the Eurozone is no longer in their interest.

This article first appeared on 23rd November,, in Dutch, in the national daily newspaper the Reformatorisch Dagblad

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